The 3 Main Reasons Business Loans Are Rejected
If you’ve applied for a business loan through a bank and had the loan rejected, you may feel like this is the end of the line and credit is not an option for you. Luckily, there are hundreds of lenders and products in the market, so just because you’ve been rejected for one loan doesn’t mean that obtaining finance is not possible for your business.
In fact, some businesses are only really able to grow after receiving some form of financing. It frees up cash flow to enable the business owner to focus their funds on growth-related activities, such as hiring specialist staff or purchasing income-generating equipment.
In this article we will cover 5 common reasons that business loans are rejected. If you have been rejected for a loan, remember that it’s not the be-all and end-all. Contact a Lendfin specialist to see how we can help you obtain the finance required for your business to grow.
1. Lack of preparation
Many small businesses are turned down for a loan simply because they haven’t prepared for the application. It’s not as simple as walking into a bank and filling out some paperwork - there is a long list of criteria that must be completed in order to have a loan approved.
Before applying for a loan, small businesses will need to produce detailed financial statements, details of personal financial standing, proof of collateral, copies of registrations, permits and leases and any other relevant legal documents. Failure to produce these documents in a timely manner is one of the easiest ways to have your loan application declined.
2. Bad credit
A credit score is a measure of a person or entities overall creditworthiness. Predictably, lenders use credit score as a major indicator of whether a business will be able and willing to repay a loan on time. To maintain a good credit score a business and its directors must make debt and utility repayments on time, keep borrowing well below the limits and minimise their number of loan applications.
Fortunately, there are still lending options for businesses with low credit scores. At Lendfin we recommend contacting us early if you have a bad credit score so we can research which type of loan would be available and best serve your business needs without further impacting your credit score.
3. Lack of collateral
Secured business loans generally have lower interest rates, however require the business owner to mortgage assets as collateral, also known as security. Most types of security have a set limit to which they can be used as collateral, for example residential homes are generally secured to 80% of their value, and commercial properties to 70% of their value.
If your assets are currently being used to secure other loans (eg. home loans) you most likely won’t be able to double up and use them for your business loans too. In such cases, it may be best to look into an unsecured loan or another loan type that does not require collateral. Asset finance and debtor finance may also be suitable options depending on the reason for the loan.
Of course, there are many other reasons that a small business may be denied a loan, however these are the 3 most common that we see at Lendfin. If you’ve been rejected for a loan in the past, contact Lendfin and we’ll help you look into the best options available to you.